- Objective quantifiable market data proves Russia's threats to sell US Bonds would be ineffective.
- Russia would likely hurt itself more than the US in a massive US Bond dump.
- Russia has in the past attempted to topple the US financial markets, so there always is a covert threat.
Recently a Putin advisor Serge Glazyev suggested that the way for Russia to strike back at the US was by selling its bonds. The theory goes that by selling the US bonds, the action will drive down the price of bonds and drive up the US interest rates. Ignoring the obvious flaw in that theory that the interest paid on existing bonds remains the same to the issuer, and any increase in interest rates would only impact bonds issued after the rate increase, Serge failed to recognize that if his policy succeeded, the party doing the selling would be forcing a lower and lower price for each bond they sold. Sure a rate increase might hurt the US a bit, but the bond holders are the ones that really get hurt. Serge may also want to review the holdings of US debt by the Chinese. They might have something to say with harming their largest customer's economy, as well as the value of their US bond holdings.
Putin adviser Serge Glazyev said Russia would strike back through financial means. "We hold a decent amount of Treasury bonds-more than $200 billion-and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner," Glazyev said earlier this month, per this Barron's report. "We will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market."
This threat however isn't new. In the book/movie "Too Big To Fail" it covers a discussion between the Chinese leaders and then Treasury Secretary "Hank" Paulson, where the Chinese informed the Treasury Secretary that the Russians had contacted them about intentionally selling US GSE bonds (Fannie and Freddie) in an effort to topple the US financial system when it was teetering.
For me this is pretty jaw-dropping stuff - the Chinese told Hank Paulson that the Russians were suggesting a joint pact with China to drive down the price of the debt of Fannie and Freddie, and maximize the turmoil on Wall Street - presumably with a view to maximizing the cost of the rescue for Washington and further damaging its financial health.
While that threat is real, and it may have had an impact during a panic or crisis situation, under normal circumstances the threat of selling US Bonds in an effort to drive up interest rates is pretty much a joke. The global bond market is simply too vast for any one or even group of entities, even Central banks, to greatly impact. I could try to explain why, but fellow Seeking Alpha author James A. Kostohryz has done an infinitely better job at it than I could ever hope to do. I'll limit my comment on the topic to simply, "James is right," and leave it up to the readers to read his article for more details.
This article isn't to explain why Russia's threat is a joke, it is to use market data to prove Russia's threat is a joke. Russia claims to have $200 billion in US Bonds. $200 billion is a drop in the bucket for a country that has a nearly $18 Trillion with a "T" debt. I won't even bother calculating out what percentage of the total US debt Russia holds, just eyeballing it makes it clear it is a pretty impotently small amount. Maybe the US should consider banning exports of Viagra to Russia, it might help their leaders snap out of their rebellious teenager phase.
Putin adviser Serge Glazyev said Russia would strike back through financial means. "We hold a decent amount of Treasury bonds-more than $200 billion
Considering the Russians hold $200 billion of US Bonds, and the Federal Reserve alone purchases $55 billion a month, down from $80 billion a month for QEfinity, the Russian leaders simply doesn't seem to understand the concept how truly large the US Bond market is. Unless they were bluffing, why set yourself up to be the fool?
To prove the point that Russia's threat is more likely to prove their impotence than strength, Foreign governments did recently dramatically reduce their holdings of US Bonds. Over a 2 week period, $118 billion in US Bonds were sold, reducing the foreign Treasury Bond holdings at the Fed to a 15 month low.
And foreign central banks are reliable buyers of this debt. Over the course of the 2013, the sum rose from $2.885 trillion to about $3.02 trillion, an increase of about $130 billion.
But in the last couple of weeks, there's been a sharp, unexpected drop in the amount of U.S. government bonds the Fed is holding for foreign accounts. From $3.02 trillion in December, the total fell to $2.973 trillion on February 26, to $2.959 trillion on March 5, and $2.855 trillion on March 12. That's a decline of $104 billion in one week, or 3.5 percent, and a fall of $118 billion in two weeks. According to the Wall Street Journal, total foreign Treasury holdings at the Fed are at a 15-month low. (The releases can be seen here.)
During that the time period between February 26th and March 12th, the yield on the 10 year US Treasury Bond was basically unchanged. $118 billion, over 1/2 the amount of Russian US bond holdings, in US Treasury Bonds were sold over a 2 week period, and the markets didn't even budge. Like a 5th grade bully pushing around a wimpy 2nd grader, the US Bond markets are telling Putin to hand over the lunch money and get lost.
What that proves is that investors are more likely to be harmed from viewing a picture of Vladimir Bully Putin without a shirt on, then from their bond portfolio losses. The bottom line is that the markets are telling Putin to get dressed and grow up, or the adults are going to send him to his room until he learns to play well with others. I tried to find a strong quote from the US President, but unfortunately was unable to find one, so I had to turn to the EU. Fortunately the US Bond markets don't rely on leadership from the US President, and implement foreign policy on their own terms. Terms very unfavorable to Putin, and unmoved by his phony macho propaganda.
German Chancellor Angela Merkel said she's moved on from the Cold War as she upbraided Russia for refusing to play by 21st-century diplomatic rules.
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